There are many different branches of science; biology, zoology, physiology, and botany, just to name a few. The commonality among these various branches is that they participate in the study of life sciences. They all focus on the study of living organisms, their life processes and interrelationships. The life sciences technology segment of the economy is a varied field in which many companies participate. Within it, investors will find many potential opportunities to buy shares of leading companies.
One of the largest global companies in the lifesciences industry, Thermo Fisher Scientific (TMO), is a $75 billion market capitalization company that has the mission “to enable our customers to make the world healthier, cleaner and safer. We help our customers accelerate life sciences research, solve complex analytical challenges, improve patient diagnostics and increase laboratory productivity.”
- There are many branches
Thermo Fisher Scientific is an amalgamation of several different companies that merged to form the current company. The company’s major acquisitions over the past decade have created their most prominent brands, Thermo Scientific, Applied Biosystems, Invitrogen, Fisher Scientific and Unity Lab Services, that have combined to comprise the four operating segments Life Sciences Solutions, Analytical Instruments, Specialty Diagnostics, and Laboratory Products and Services.
Life Sciences Solutions Segment: Provides a portfolio of reagents, instruments and consumables used in biological and medical research, discovery and production of new drugs and vaccines as well as diagnosis of disease. These products and services are used by customers in pharmaceutical, biotechnology, agricultural, clinical, academic and government markets. This segment makes up 26% of revenue.
Analytical Instruments Segment: Provides instruments, consumables, software and services that are used for a range of applications in the laboratory, on the production line and in the field. These products and services are used by customers in pharmaceutical, biotechnology, academic, government, environmental and other research and industrial markets, as well as in the clinical laboratory. It includes chromatography and mass spectrometry, and chemical analysis. This segment makes up 19% of revenue.
Specialty Diagnostics Segment: Offers diagnostic test kits, reagents, culture media, instruments and associated products to serve healthcare, clinical, pharmaceutical, industrial, and food safety laboratories customers. The healthcare products, for example, are used to increase the speed and accuracy of diagnoses, making patient care more effective and cost efficient. This segment makes up 18% of revenue.
Laboratory Products and Services Segment: Offers everything needed for the laboratory, and makes up 37% of revenue. TMO has a unique business model of both internally manufacturing and sourcing products. Their vast offerings enable customers to focus on core activities, allowing them to have more efficient, productive and cost-effective outcomes. Pharmaceutical, biotechnology, academic, government and other research and industrial markets, as well as the clinical laboratory, are key clients for this business segment.
Keys to Investment
TMO’s legacy business utilizes the razor/razor blade strategy, meaning the consumables used in laboratories provide a strong recurring revenue stream. TMO fortified that recurring stream with their various acquisitions, evolving the legacy business strategy into new markets and products. In 2016, their largest growth segment, based on data from the company's annual report, was the Laboratory Products and Services business, which posted a growth rate of almost 38.5%. The Specialty Diagnostics business grew 18.3% over 2015 — the slowest growing of the segments. Life Sciences Solutions had the second to highest growth in 2016, slightly more than 27% over the previous year, and Analytical Instruments grew 20.1%.
Future growth is expected to come from both organic opportunities (growing existing markets and products) and acquired growth opportunities. Acquisitions that strengthen the already strong market position, or help the company penetrate new market and product opportunities, along with synergies they provide, will continue to be the focus of the management.
In May, 2017, TMO acquired the Dutch drug-ingredient company Patheon NV for $5.2 billion, adding to the $22 billion "buying binge" over the past five years, Bloomberg reports. As of January 2, 2018, TMO is trading at a price-to-earnings (P/E) ratio of 32.24, in line with the S&P 500’s P/E of 25.85 times. Current market capitalization is $75 billion.
As with all acquired growth strategies, risks exists concerning deal integration or unachieved/underachieved expected deal synergies. In addition, slowing growth in healthcare R&D funding, utilization or reimbursement will impact TMO’s forward valuation.
The Bottom Line
Thermo Fisher Scientific is a company that aids many different market segments in performing their crucial functions. Without the Laboratory Products and Services and also Analytical Instruments, clinical laboratories would be unable to perform laboratory tests, and biotech or pharmaceutical companies would not be able to run clinical trials. Without products from the Specialty Diagnostics segment, food and water safety could not be ensured. This company is vital to many of the products and services used to satisfy crucial components of daily living. TMO has a strong history of merging with and acquiring companies that solidify market position or introduce new markets and products to fit with their current portfolio, a trend expected to continue in the next few years.